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Buying or Selling a Home/Cap Gains on sale of second home

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Question
Hello,
When I sell my Woodhaven, NY house, which is not my primary residence (I live in VA) and I never lived there more than a year since one year in 1978, will I have to include my net sale profit of this property as income for the tax year when it comes to figuring Capital Gains?
As a retired and 100% disabled 68 year old caring for both elderly disabled parents in my home here in Virginia, my wife and I fall into the lowest two tax brackets. If the net sale profit is added, then my tax bracket shoots way up. Does the net sale profit get added as income for the tax year?
Thank you,
Richard

Answer
Hi Richard,
Sorry for the delay in answering your question.

Your question is more in the category for a Certified Public Account.  Check the All Experts site for such an expert.

I will give you some basic information per IRS rules in the links below, but I am not an expert in this department and my comments are NOT intended as advice for you.  Please consult an accountant for accurate, up-to-date information and advice.  

My understanding is that the only amount excluded from tax on the gain (profit) of a home sale ($250,000 for a single person, and $500,000 for a married couple) is for a PRIMARY RESIDENCE only.

How your second home was and/or is being used will determine what an accountant will advise you to claim and/or report on your tax return.

Has your Woodhaven, NY home ever been RENTED?  If so, and it is now classified as rental property, hopefully you will have all your prior records for depreciation on your initial investment and any capital improvements added over the years.  

Capital improvements, generally, are improvements that add value to a home and have a life expectancy of over one year (i.e., a new roof or HVAC system).  If this home is being rented, you can add to your original basis (cost) any capital improvements added over the years while it was being rented.  (It can get more complicated if a property was used personally for a while, and then rented out.)

Capital improvements are added to the ORIGINAL BASIS (cost) of a property to arrive at an ADJUSTED BASIS.  Here is a link to IRS Publication 532 explaining capital improvements and the sale of a home:  http://www.irs.gov/pub/irs-pdf/p523.pdf

The depreciation claimed on a rental home (and also the depreciation claimed on any capital improvements added over the years for a rental home), will have to be recaptured and added back to the adjusted basis, with any fix-up expenses (as defined by IRS) being added back in.

Here are two links I found on the IRS site relating to the sale of a SECOND HOME AND RENTAL AND VACATION HOMES:
http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently

http://www.irs.gov/publications/p527/index.html


Here is a link on Publication 527 referred to in the first link above:
http://www.irs.gov/publications/p527/index.html


Publication 544 also has useful information you may want to read (pay particular attention to the section on Capital Assets):
http://www.irs.gov/pub/irs-pdf/p544.pdf

As you will see from some of the information available on the IRS site, this can be an extremely-complicated process, and I strongly recommend that you contact an accountant for advice, preferably a Certified Public Accountant.

Below is an over-simplification of how I understand the process (again, not to be construed as accounting advice):

1.   Capital improvements are added to your original basis (cost) of what you paid for this home – to arrive at your adjusted basis.
 
2.   For RENTAL and INVESTMENT property, depreciation claimed over the years (on your original investment price and also any capital improvements added over the years) is recaptured, or added back to your original basis.    

An accountant will be able to give you specific details on all you need to report, along with any fix-up expenses to sell, which are a deduction from your adjusted basis.

3.   For a PRIMARY RESIDENCE, capital improvements can generally be added to your original basis to arrive at your adjusted basis, but NO DEDUCTION is allowed for depreciation.

4.    For a second home used by an owner for personal use (and not rented out), from what I have read in the links above, a loss is not allowed.

5.   The difference in your adjusted basis and your sales price is your profit -- or loss -- over the years.

6.   On RENTAL property sales, if you have a profit the gain is reported, and any loss can be deducted.

7.   On your PRINCIPAL  RESIDENCE, If you have a profit, AS LONG AS the profit (NOT the sales price, see the next paragraph below)  is within the IRS allowable exclusion amount for your filing status (married, widowed, or single), you should not owe any tax related to the sale.  Any profit above the exclusion amount would be taxable.  

Many people think the exclusion amount is the sales price; not so:   The exclusion amount for your filing status is the amount of PROFIT that can be excluded from tax on the sale of a principal residence…and your profit is the difference in your adjusted basis and your sales price.

I hope the above is helpful.  Feel free to write again if you have additional questions I might be able to help with.

Regards,
Elizabeth  

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liznarr

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I can answer questions relating to the purchase and/or sale of residential homes and land, including what a really good agent should be expected to do and/or not do; where to turn when problems occur; and questions regarding disclosure. I`m a Licensed Realtor in the Southeast since 1984 with designations of Broker, GRI, CRS, and CBR (Certified Buyer Representative). Current active and Life Member of Million Dollar Club, Certified by State Real Estate Commission to teach Pre-Licensing and Continuing Education courses, specializing in Agency. Currently serving on Grievance and Professional Standards Committees, and Education Committee in past.

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